Cruise Ship Sinking in Peak Booking Season May Worsen Losses

The cruise ship Costa Concordia lies stricken off the shore of the island of Giglio, in Giglio Porto, Italy on Jan. 14, 2012.Photographer: Laura Lezza/Getty Images

Jan. 16 (Bloomberg) -- Carnival Corp.’s losses following
the grounding of the Costa Concordia cruise ship off Italy may
be exacerbated by the disaster coinciding with the start of the
peak booking season.

About one-third of all cruise vacations are arranged during
the so-called wave season from January to March, said Sharon
Zackfia, an analyst with William Blair & Co. in Chicago.

“They’re the most profitable bookings,” Zackfia said in
an interview. “Presumably most people now are booking for the
key summer season, which is when the cruise lines make the bulk
of their money.”

Europe generated about 38 percent of Miami-based Carnival’s
revenue in fiscal 2010, the last full year for which geographic
results are available. Its Genoa-based Costa Crociere unit is
the continent’s largest cruise line based on passengers and ship
capacity, according to Carnival, the world’s biggest cruise
operator with brands including Cunard and Princess Cruises.

“The timing of this event could weaken 2012 booking trends
given the fact that it occurred early in the wave season,”
Emile Courtney, a New York-based Standard & Poor’s credit
analyst said in a note. The grounding “could weigh on booking
trends across other cruise brands.”

Credit Rating

Carnival will probably retain its BBB+ grade, the third-lowest investment ranking, S&P said after assessing the cruise
operator’s ability to cope with a 3 percent drop in industrywide
net revenue yields caused by price cuts. The ratings company had
anticipated “low-single digit growth” for major operators,
according to the note.

Royal Caribbean Cruises Ltd.’s BB rating and NCL Corp.’s B+
grade are also unlikely to be unaffected by the incident, S&P
said. Still, for all three lines, lease and port commitment
adjusted debt to earnings would increase to “near our maximum
thresholds” for current ratings under a 3 percent drop in
yields, the ratings company said.

Carnival has $325 million of bonds outstanding, according
to data compiled by Bloomberg. Dually listed Carnival Plc has
the equivalent of $1.45 billion of bonds, the data show.

Carnival will lose business from customers who were booked
on future Concordia voyages, Zackfia said. There will be
additional costs that are hard to estimate, she said. The
company doesn’t have insurance that covers lost revenue or
earnings from its ships or other operations, according to its
most recent 10-K, filed in January 2011.

“They will obviously have customers who were booked on
upcoming Concordia journeys that aren’t going to happen,”
Zackfia said.

Carnival Plc plunged 16 percent to close at 1,878 pounds in
London trading. U.S. markets were closed for the Martin Luther
King Jr. holiday.

Death Toll

Five people were confirmed dead and about 15 remain missing
from the Costa Concordia, which ran aground the night of Jan. 13
near the island of Giglio in the Tyrrhenian Sea. Three people
were found alive in the capsized cruise liner. The ship’s
captain has been arrested and accused of manslaughter,
abandoning the vessel and causing the shipwreck.

Rescue workers evacuated more than 4,000 of the 4,229
passengers and crew aboard, Italy’s Civil Protection agency said
on its website. Costa customers come primarily from Italy,
France and Germany, according to Carnival. Passengers onboard
the Costa Crociere also came from countries including South
Korea, the U.S. and Japan.

“I can’t believe such an accident could happen,” said
Kengo Kuno, general manager at Tokyo-based Overseas Travel
Agency Co., which sells Costa cruises in Japan. “I am sure it
will have a negative impact on the next cruising season.”

Search & Rescue

Search and rescue operations were due to continue through
the night, according to the regional government in the province
of Grosseto. Costa Crociere has been ordered to remove the ship,
according to the statement.

“I want to express our deep sorrow for this terrible
tragedy,” Gianni Onorato, president of Costa Crociere, said in
a statement. “I am only now able to speak on behalf of Costa
because, as you will understand, I have been at Isola del Giglio
to be close to the rescue operations.”

The ship had embarked from Rome on a trip that was to
include stops at ports in France and Spain. The liner hit rocks
and Captain Francesco Schettino, after assessing the damage,
decided to secure the ship and gave the evacuation order,
Onorato said.

Ship Handover

The 1,500-cabin Costa Concordia was delivered to Costa
Crociere in 2006 by Fincantieri Cantieri Navali Italiani SpA,
according to the Trieste-based shipbuilder’s website. The cruise
unit, which has 15 ships operating worldwide, in 2007 agreed to
pay 510 million euros ($647 million) each for two more similar-sized vessels. The Costa Favulosa, added to the fleet last year,
and the Costa Fascinosa, scheduled to enter service in May, were
to increase Costa’s capacity by 20.4 percent, according to
company filings.

Carnival carries insurance that covers a number of risks
within certain limitations, according to the January 2011 filing.
The coverage includes hull and machine insurance, as well as
protection and indemnity policies that include crew and
passenger injuries, shipwrecks, damage to third parties and
pollution.

Ship Insurance

The company also had practiced some self-insurance in the
past, according to Zackfia and to filings. Carnival had no
immediate response to requests for specifics of its coverage.

The Costa Concordia was insured by companies including
Assicurazioni Generali SpA, RSA Insurance Group Plc and XL Group
Plc, said three people with knowledge of the policies. The three
are among several insurers facing total costs of about 405
million euros, said one of the people, who declined to be
identified because policy terms are confidential.

“This is a company that has a very strong, solid cash flow
and balance sheet,” Zackfia said.

Bookings had been “strong” heading into the wave season,
Chairman and Chief Executive Officer Micky Arison said in a Dec.
20 statement, with “slightly higher prices with slightly lower
occupancies.”

For the year ended in November, revenue rose 9.2 percent to
$15.8 billion, Carnival said on Dec. 20. The company projected
then that net income would rise to $2.55 to $2.85 a share this
year, adjusted for one-time items, from $2.42 in fiscal 2011.

The company’s last major incident happened in November 2010,
when an engine fire aboard Carnival Splendor stranded the cruise
ship off the California and Mexican coasts for days, with more
than 4,400 passengers aboard. Splendor, which has since been
repaired, was used for Mexican Riviera voyages from Long Beach,
California.

“Historically, they’ve had a very good safety track
record,” Zackfia said. “This is definitely a tragic event. I’m
sure the company is taking this seriously.”